The 50-30-20 Budget is Stupid; Here’s What to Do Instead

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The 50-20-30 budget is one of the most popular budgets according to personal finance “experts.” In it, you spend 50% on needs, 20% on savings/debt reduction and 30% on “wants.” This is a terrible plan for almost every income and lifestyle and below I will explain why. The 50-30-20 budget is stupid and I will show you a better way.

How to Waste Money on a Budget

The 50-30-20 budget has pitfalls for entry-level and high salaries alike. First, let’s consider the following hypothetical spending of a 23-year old singleton college graduate who makes a slightly below average entry level salary of $38,000/year ($30,000/year post-tax) and has 4% salary increases:

Age

Post-Tax $

Annual Wants

Monthly Wants

23

30,000

9,000

750

24

31,200

9,360

780

25

32,448

9,734

811

26

33,746

10,124

844

27

35,096

10,529

877

28

36,500

10,950

912

29

37,960

11,388

949

30

39,478

11,843

987

31

41,057

12,317

1,026

32

42,699

12,810

1,067

Total

$360,183

$108,055

Starting with a modest entry-level salary and modest raises, this person has spent $108,055 over just 10 years on indeterminate “wants.” What a 30% wants budget means is that for every 10 years, she spends the equivalent of three full years of work on wants. Over a 40 year career, this number would increase to half a million – the full salaries for 12 years of work.

What Do You Get if you Spend $100k on Wants?

If you think about spending $100k on “whatever you want”, you would likely think of having something really awesome and long-lasting. $100k is enough for a designer wardrobe, a nice car, some nice vintage furniture, lavish vacations, and/or a big wedding.

Many people think of budgets as ways to restrain spending but, if used incorrectly, they can be the impetus to increase spending. Say this person is 23 and has never made any real money before. She now has license to use $750/month with no real purpose every month. How is this person going to spend that $750?

She probably has some ideas for great splurges but in reality, she’s going to spend money in easy ways. Average Americans can easily fritter away $18,000/year on nonessentials such as eating out, drinks, taxis, subscriptions, apps, streaming services, or online shopping.

At the end of 10 years, you have the latest versions of things you used to have when you were 23, your closets are filled with stuff, you have a fair number of frequent flyer miles and you wonder, why am I still in debt?

All this regret and you’ve been sticking to a budget. You did everything the financial gurus told you to do, but you might not be getting any freedom for your finances.

Where Americans Are Not Spending Their Money (But Should)

I’m a believer that so long as you spend to ensure a secure future and on what matters to you, you are free to spend on whatever you want. But even with every financial advisor advertising this budget, people are spending on wants and forgetting needs. According to USA Today, “[t]he tendency to splurge consistently on nonessentials is causing Americans to skimp on other important items.”

38% of Americans say they don’t have enough money to fund a retirement account, 35% can’t afford a life insurance policy, 28% have credit card debt, and 26% live with a broken car because they can’t afford repairs.

In terms of achieving their dreams, 40% of Americans have never left the country – most citing financial reasons. 11% have never left the state where they were born. Americans think they are spending on the good life, but they are stressed and still can’t find the money to live the good life.

But if You’re Saving 20%, That’s Good, Right?

With all the talk about how little Americans are saving, if people started saving 20% of their salaries, they’d be in a much better place, right? This might just be a low-bar budget for people who can’t manage lofty goals.

I guess if your goal is to be better than the bare minimum, then yes, it may be better. But I also wonder if you’re striving to a very low goal, if you fail, are you really saving any money at all?

Age

Post-Tax $

Average College Debt

Annual Savings

23

30,000

-30,000

6,000

24

31,200

-24,000

6,240

25

32,448

-17,760

6,490

26

33,746

-11,270

6,749

27

35,096

-4,521

7,019

28

36,500

2,498

7,300

29

37,960

9,798

7,592

30

39,478

17,390

7,896

31

41,057

25,285

8,211

32

42,699

33,497

8,540

Total

$360,183

Let’s say you graduate with average college debt (I picked the average between private and public school debt). After 10 years of following this budget, paying down debt, you’ve saved $33,497 out of $360,183 take home. Ok that’s not so bad.

But you’ve been gainfully employed for 10 years and you’ve really only managed to save less than 10% of what you’ve taken home. Let’s say you want to go back to school or have a kid or buy a house. You’ve spent over $100,000 on wants and you have $33k in cash. And your early 30s is when things start to get expensive.

What If We Use Lawyer Salary Numbers?

The wastefulness of this budgeting plan is put into starker contrast with a higher salary. Let’s consider a lawyer’s trajectory on this plan.

Post-tax salary

Debt

Annual Debt Payment/Savings

“Wants”

26

150,000

-150,000

30,000

45,000

27

163,500

-120,000

32,700

49,050

28

174,945

-87,300

34,989

52,484

29

187,191

-52,311

37,438

56,157

30

200,295

-14,873

40,059

60,088

31

214,315

25,186

42,863

64,295

32

229,317

68,049

45,863

68,795

33

245,369

113,913

49,074

73,611

Totals

1,564,932

469,480

This is a very rough estimate – based roughly on BigLaw payscales and average law school loan lodes, including bonuses and I’m not adding interest to the loans because I have you paying them off at record speed.

Let’s say you work 8 years at a law firm. You are working crazy hours and you’re being paid to justify it. You make $1.5M over 8 years AFTER TAX! So impressive! You see that number in bold – $113,913? That’s how much you get to see in your bank account after all this. After 3 years of grueling law school, 8 years of grueling work, you haven’t even saved up enough money for one year of your expenses ($245k/2=$122.5k)! Let’s look into how this budget said 50% spent on expenses was fine and that means you can spend $122,500 on living for one person! You could spend $5,000/month on an apartment with that kind of money – and you probably shouldn’t.

Where did all your money go? Look at that number in the far right – almost half a million. That’s all “wants.” You spent FIFTY THOUSAND DOLLARS A YEAR on wants. You could set a luxury vehicle on fire every year.

This is the best case scenario where you are continually employed, you follow a budget, and if something happens in year 8 – like switching to a new job- you have very little leeway. And following this budget doesn’t get you very far.

Why the 50-30-20 Budget is Stupid

The idea of using percentages without accounting for your your lifestyle or your income is an odd one. Whether you’re making minimum wage or a million dollars, starting our in your career or in retirement, have a stable single income or multiple variable income streams, single without dependents or the breadwinner for a family of 10 – somehow 50% is the right needs amount and 20% is the right savings amount? And this doesn’t even include what your goals for your savings might be – a house, college tuition for the kids, or a little vacation.

At low incomes and young ages, 50% is likely far too little to spend on needs. And thus 30% is far too much on wants, when you really need to shore up savings. You are the most vulnerable to fluctuations in the market. And this is typically the cheapest time to live because you will have other people who live the same way and you may have fewer responsibilities. Your focus should be on learning and earning more.

At middle and high incomes, you’re just blowing through more money than at a lower income. As a result of following this budget, you’re not getting ahead.

My Problems with the 50-30-20 Budget

When I was straight out of school, I saved 50% of my income. In my first job out of law school, making 5x my entry-level salary, I saved 0% because I was aggressively paying off my loans. After I paid off my loans, I was back to 50%. And now that I’m in a funemployment year, I’m back to saving 0%. At no time did I save 20% and I’m not sure you could argue I would be in a better place if I had changed to a 20% savings rate. Following this budget would mean frittering money away when I was saving a lot and struggling immensely to find 20% in lean times.

Percentages don’t work for everyone and it’s silly to assume they would. Your salary expands and grows and your necessary items expand and grow. As they say, the only constant is change.

You Are Constantly Treading Water on a 50-30-20 Budget

The 50-30-20 budgets lacks a priority list. If you can get your must haves to 50%, then the next most important part is 20% savings/debt reduction. But many people have necessary costs that exceed 50% and then scrap the 20% altogether.

Percentage increases let you increase your lifestyle mindlessly for all time. It doesn’t require you to think, hey I have enough now. That’s why people think, oh when I make $X, I will spend more responsibly. As you can see from above, it’s not true. You get on this mindset that if the percentages work out, you’re doing ok. But the percentages mean nothing without goals.

The percentages don’t matter – what maters is what you’re spending your money on. Yes you only wasted 30% of your money every year but why waste any money? Why not treat every dollar as valuable and important?

Wants is a dangerous category. We are often chasing things that not only don’t make us happy, but make our lives more complicated and expensive.

The 50-30-20 budget is something that’s marketed as one-size-fits-all but in reality just fits everyone poorly.

In my opinion, the 50-30-20 budget is stupid. There’s probably a better word for it, but it works. Therefore, instead of using this type of budget, here’s another perspective.

A Possible Solution – A Goals-Based Budget

Twenty somethings regret not traveling more, not building close relationships, not exercising, not trying new things. Instead of putting an indiscriminate “wants” category, perhaps you could subdivide your “wants” budget to address these possible regrets.

Chinese billionaire Li Ka-shing offered some interesting budget advice. Some background on Li, after his dad passed away, he was forced to start working 16-hour days at age 15. He did not come from wealth but is worth an estimated $31 billion today.

Anyway, Li’s advice is to divide one’s budget according to the following categories:

50% live. 20% save. 15% grow. 10% build. 5% play.

Since I’ve just railed on percentages, I’ll say here that these percentages do not need to be set in stone, but use it as a guideline for remembering to spend on things that will actually improve our lives – like our relationships and a meaningful career and higher earning power. Also, I like how the “wants” category isn’t crazy. 5% for “play” sounds like a good reminder to incorporate fun into our lives while not neglecting any of the more important categories. Consequently, this budget seems to work better towards achieving one’s goals – that’s why I’m calling it the “goals-based” budget.

Here’s How A Low Income Budget Would Work

Here’s an example of what this looks like on the same $30k post-tax salary:

Play (whatever you want)$125 entertainment/eating out
Total = $125 = 5%

What It’s Like to Use a Goals-Based Budget

You get $50 to spend on networking this month. Who do you want to meet and treat to coffee? A cute dating prospect? Your coworkers? People with your potential dream job?

You get $200 to travel this month. Where do you want to go? What do you want to see? Paris? Polynesia? Pittsburgh?

You have $100 to spend on classes. What do you want to learn? Java? Italian? How to bake a cake? How to play the piano?

Even you can’t make these percentages, that’s fine. It’s something to work towards. The point of a budget is structure, not perfection. The beauty of this budget is that if you follow it perfectly, you will grow and you won’t squander too much of your money away on activities and products that you won’t remember.

Here’s How A High Income Budget Would Work

Here’s an example of the budget on a $150,000 post-tax high-income law salary:

One thought on “The 50-30-20 Budget is Stupid; Here’s What to Do Instead”

I agree. That budget kind of forces you to spend more on wants than you save. Sometimes you are content, you have all you want, and you can stuff a ton in savings that month. I just don’t get a budget that tells you to spend on things you don’t need. It’s better than nothing but you concept of budgeting to build and grow, that’s genius.